By Hamlin Lovell, NordicInvestor 

This article forms part of our report on Alternative Credit in the Nordics

Global maritime insurer Gard, headquartered in Arendal, manages around USD 2 billion, and its liabilities on the shipping insurance side are also in USD. Gard does strategic and tactical asset allocation, but all asset management beyond TAA is external. NordicInvestor interviewed Senior Investment Risk Analyst, Thor Abrahamsen, to hear more about the new and growing allocation to 15 private credit managers and some changes on the liquid credit side.

Yield pickups, risk mitigation and diversification

Gard invests in private credit for yield pickup, though it has declined over the past year: “when short term interest rates were zero the potential return of 10-12% in USD was a clear yield pickup. Now that short-term government debt pays 4.5% the relative pickup is probably lower but potential risk mitigation versus public corporate debt remains interesting because private lenders have more and better information than public credit investors,” argues Abrahamsen.

Diversification is another attraction that goes beyond quarterly valuations removing some market volatility. For instance, “going outside the property sector adds diversification”.

A 10-12% return target on private credit currently works out at a yield pickup of 500-700 basis points over Treasuries, though it is of course a smaller pickup over corporate credit. In public markets, a single A rated US corporate credit only pays 115 over Treasuries while High Yield could offer 400. If private credit is typically estimated to have an equivalent credit rating somewhere between these two, working out at a credit spread of 250 over Treasuries. then the private yield pickup over public debt of equivalent credit ratings could be around 250-450.

This premium is for sourcing and speed of execution, on top of an illiquidity premium.

However, these broad averages ignore the wide range of spreads in the space. Inflows have reduced returns in some areas of direct lending. “But the yields can vary a lot between segments such as asset-backed and mezzanine, and also depending on how much equity risk and complexity risk there is,” explains Abrahamsen.

Diversification within private debt

Gard’s managers are running quite broad mandates where they can pick and choose which areas of the market to focus on: “For a new asset class, we want maximum diversification to get used to it. We can narrow it down to more niche strategies and sectors later on”.

Currently, the allocation is biased towards middle market private equity sponsored lending, which Abrahamsen admits is a relatively crowded space with as many as 200,000 managers in the US. Gard also has managers specialised in Northern and Southern Europe and overall, the alternative credit allocation is evenly split between Europe and the US.

Delaying the credit cycle

Managers may need to track 250 or more private companies, and make early write downs if necessary or possibly extend the maturity: “If a sponsored company has problems, the private equity sponsor may be able to patiently work out or restructure the deal and avoid a credit event. Or they might sell a deal ono a distressed fund, but they are not forced to sell upon downgrades or defaults in the way that some public managers are”.

A pessimistic view is that this is “extend and pretend” which just delays the evil moment of the company’s failure. An optimistic view is that extensions give companies time to adjust their own operations and balance sheet or wait for better economic and financial market conditions. “Delaying the credit cycle in this way could turn out to be either positive or negative,” says Abrahamsen.

Strategic increase in private credit

Increasing private credit is a long term, strategic and structural goal for Gard. Higher interest rates on cash afford Gard the luxury of patiently scaling up its private debt allocation without having to worry about the cash drag of zero interest rates. Cash is held in money market funds or short-term Treasuries.

Liquid credit: high yield credit spreads not high enough

In contrast, Gard has made a tactical move to reduce publicly listed high yield debt, partly because the risk premium element of returns has not risen enough. “Most of the rise in yields has come from interest rates. High yield credit spreads are only up about a percent,” says Abrahamsen. “This means that there is not much more credit risk priced into bonds, despite higher rates making refinancing more difficult and a large part of the high yield universe needs to refinance in 2023 or 2024. Investors are not getting paid for credit risk, especially on a single B credit or below. We think yields are more likely to widen than narrow. Even if there is a recession the central banks still need to deal with inflation”.

For investment grade credit, spreads are near the averages of the past 20 years and defaults are few and far between.

Elsewhere in liquid credit, allocations are more stable: “The mortgage-backed securities allocation is steady but quite fluid. Bank loans are stable and CLOs might be increased. There is some specialty finance and asset-based lending,” says Abrahamsen.

Government debt is in the US and Japan, with no European sovereigns, though there is some GBP and EUR corporate debt.

Some areas are avoided. There is no exposure to insurance linked securities or infrastructure debt. There is no trade finance, in part because its risk profile is too close to Gard’s core business of maritime shipping.

Finding genuinely active managers in EM

Gard is adding to emerging market debt, mainly in sovereigns, but has had mixed experiences with the asset class in the past and needs to find genuinely active managers. “The problem is that some managers stay too close to market cap weighted benchmarks, which are relics of the 1970s and 1980s and are dominated by the most indebted countries,” points out Abrahamsen.

Macro outlook and default risks

The base case is a tough climate for credit, but not a repeat of the GFC: “We have not had a proper default cycle. You cannot raise interest rates by 4% in a year without something breaking. Back in 2018, the market panicked after a smaller increase in rates. Overall, it is a much more challenging environment, with high inflation, high volatility and high interest rates. Having said all that, we do not expect the sort of systemic and liquidity risk seen in 2008”.

The “Black Swan” tail risk now would be a collapse of inflation:“We expect inflation to stay higher for longer and are rediscovering how to invest with inflation. The US is fighting inflation but Europe is not doing much about it. We view disinflation risk as a tail event. If it happened it would take a lot of credit risk away from high yield”.

Due diligence and vehicles

Gard has a long-standing 15 year relationship with one of the global investment consultants, who help with the private credit search. “They pre-screen a list of potential managers, we have two or three meetings with the manager, and they help with the heavy DD”. Ideas can also come from conferences, third party marketers, networks and other sources.

There is no hard minimum length of track record but Gard would not invest in a brand new manager and expects to see assets generally at least USD 1 billion. Across the overall book, the main vehicle is SMAs but in private credit, Gard’s ticket size is not currently big enough for SMAs.

The private credit strategies are all housed in multi-year locked up structures. Other credit funds are in a mix of daily managed accounts and monthly dealing funds.

The secondary market for private debt is not as mature as for private equity, but it is developing. “At least one consultant is building a platform for evergreen funds, which also includes liquidity management to match inflows and outflows. The secondary market should grow in future,” says Abrahamsen.

Domiciles could be onshore or offshore.


ESG is climbing a learning curve: “Managers are providing much more ESG data as the ESG process becomes institutionized, but a larger volume of data does not necessarily have more value.  This is an evolving part of the industry where the focus may in time shift from E to S and G”.

Environmental ambitions may need to be delayed: “The Russian invasion of Ukraine has contributed to more use of coal, and probably means that decarbonization will take longer”.

Gard does not have an ESG policy on weapons.

For now, impact investing is being pursued through public markets